DAOs, Smart Contracts and… Who? Me!?

Earlier this year I and Dr. Max Ganado listed several reasons (see our paper  Legal Personality for Blockchains, DAOs and Smart Contracts) why recognising “Legal Personality” to so-called Innovative Technology Arrangements (ITAs) makes a lot of sense. (Note: An Innovative Technology Arrangement is a generic term used in the Maltese Blockchain Laws that encompasses blockchain/dlt platforms, smart contracts, DAOs, AI and other technologies that share the traits of autonomy and at times even self-sufficiency).

The idea of legal personality for ITAs is firstly received with a lot of skepticism. Lawyers, politicians, businessmen, policy makers, corporate service providers and in general those engaged in the business side of things have a number of reservations. Likewise, software engineers, open source proponents, technologists, and all those driven by the ideals of decentralized power are also skeptical about the idea. We listed a dozen arguments. While some of them might seem very abstract, academic and remote, there are very practical practical and important motivations that need to be appreciated.

But it is only when you are touched directly, in person, that you might relate to the significance of those arguments.

The Thing is Decentralized and can not be Regulated

A most common reaction is that decentralized applications cannot be regulated – and do not need regulation at all in order to function, let alone legal personality. This objection – which we accept as completely valid – arises from a perspective that puts focus on the technology arrangement itself.

A different but co-existing and necessary perspective is one puts focus on the people involved with the technology arrangement. Broadly speaking, there are three categories of people that we consider:

  • The developers themselves.
  • The consumers or clients or users of the services offered by the ITA.
  • The investors or participants who contribute funds to the ITA in expectation of returns or governance rights.

The critical consideration is that all of these people are real people – flesh and bone individuals or corporate entities – that live and operate in geographical territories, and  hence are subject to the laws of their jurisdiction. They are subject to real world laws that establish their rights and obligations. It is those legal rights and obligations of real people that can better be granted or enforced if an ITA is given legal personality.

It is not about the ITA. It is about you!

Yes! This is indeed about you rather than the ITA, because it affects your rights and obligation, in your jurisdiction. The ITA itself couldn’t care less about your rights and obligations (why should it? It is decentralized and immaterial after all!). But we – social and interacting human  beings – should care about our own rights and obligations, ITAs notwithstanding.

For instance, it is in the interest of any user of an ITA to have it granted legal personality, as that is a clear way to distinguish between the liability placed on the doorstep of the operation, and that of the users who risk being treated as partners or co-owners.

Likewise for those who are on the creative side of the technology – the software developers, designers, engineers, open source and decentralization advocates, have very much at stake here; and that it is in their best interest to have legal personality recognized to their creations.

Let’s look at this case in more detail.

Who was Smarter: Satoshi or Vitalik?

In my original post, Malta Blockchain Regulation Proposal: Legal Personality for DAOs and Smart Contracts,  I introduced the topic with these words:

What characterizes these “Technology Arrangements” is that they might all have a degree of autonomy whereby, when interacting with human counterparts, they might produce damages of various kinds. The troublesome question that the proposed bill is trying to address, is: who is responsible for such damages.

Who is responsible? The naive answer would be invoking the decentralized nature of the ITA: “Nobody, because the software is decentralized and escapes all jurisdictions.” Another naive answer would invoke the notion of the Code is the Law: “Nobody because all the rules are determined by the code, and anything can happen and is materially allowed by the code has to be accepted as legitimate.”

The problem is that lawyers will not be content with such answers, especially if there are cases of large damages. They will want to find someone responsible and liable, a culprit or a scapegoat. They will try very hard to apply the Nearest Person principle, which basically allows law enforcement to arrive to the first person that seemingly bears some responsibility in whatever sequence of events caused the damages.

To illustrate what this means, consider this question: between Satoshi Nakamoto (the creator of the Bitcoin protocol and software) and Vitalik Buterin (the creator of the Ethereum protocol and software), who is the smarter?

While we will leave that question undecided in terms of who of  them is a greater geniuses in the field of cryptographic decentralized applications, with respect to what we are discussing here, there is little doubt that Satoshi is smarter!

[Sorry, Vitalik! 🙂 ]

The reason is this: if something really bad happened and produced significant material damage because of or through the underlying protocol (Bitcoin or Ethereum), any harmed party could claim damage against the creators of the technology. The creator is the one whom the lawyers would happily apply the “Nearest Person” principle to get to, and promptly arrive to the conclusion that Satoshi or Vitalik would necessarily have to be held liable, even if the damage was produced by the decentralized code they created.

Now clearly Satoshi is the smarter, because he, she, they (or “it”) remained anonymous. As long as that anonymity remains in place, Satoshi would escape any liability claim. In this case, the Nearest Person principle cannot  possibly be applied, simply because there is no known “nearest person.”

(Note: it is clear that in reality the Bitcoin protocol has subsequently been developed by other known people in the Open Source/Bitcoin community. Those people would be within reach of the nearest person principle; but to illustrate the case, let’s limit the reflection to Satoshi and Vitalik alone. Most decentralized applications will be of the “Vitalik” kind, where there are known subjects that are the creators or contributing creators to the software artifacts.)

What could happen with Vitalik instead? He could be brought to court and maybe imprisoned in multiple jurisdictions – maybe even in such places where basic human rights are not granted. That is certainly not an encouraging prospect!

The Ticking Time-Bomb: Developers as Fiduciaries

Being brought to court in some remote country is maybe far fetched. However one might not need to look too far away to find similarly challenging scenarios developing.

For instance there are scholars, especially in the USA, who are favoring the idea of considering developers of public blockchains as fiduciaries. In particular, Angela Walch in her paper In Code(rs) We Trust: Software Developers as Fiduciaries in Public Blockchains expresses this notion.

While anyone with practical experience in how open source software development actually happens would immediately dismiss such an idea as questionable, we must consider the eventuality that such positions could be turned into laws in certain jurisdictions. The idea is taking foothold even in EU.

The consequences would probably be execrable in term of actually arresting innovation and making software engineers flee to more sensible jurisdictions.

Legal Personality is a Liability Shield for the Developers

Yet for those that remain subject to such rulings, the risk of being brought to court would be inconceivable. For such unfortunate developers, it would make sense to shield off liability through such a new instrument as the one proposed here. The legal personality of technology arrangements, would take all the hits.

In fact in all these instances, the benefit of Legal Personality is primarily for the protection of the developer and for ensuring that innovation can continue to happen. We agree that the decentralized app itself doesn’t gain any benefit from this – but if you are a developer, this is a way to protect yourself.

Especially if you are an Open Source contributor

Liability Shields through Corporate Structures are not Sufficient

Often a counter argument is made that a limited liability company or foundation will protect you. That is true if you are part or behind such a legal structure. However this doesn’t cover all contributors, especially in a setting of open source software.

The situation could be as paradoxical that the commercially interested stakeholders who set up companies and foundations are protected; while we might have armies of individuals, people who merely contribute their code to Open Source projects (as a means of artistic expression or because driven by  ideals), who would become the only direct targets of liability claims.

What does it mean? A liability claim could find a number of culprits – the individuals behind a company would be safeguarded; but those that acted in an individual capacity as open source contributors would have to stand the trials on personal basis. Very unfair towards the weaker.

Legal Personality is Essential for the Freedoms of Open Source

Legal personality recognized to ITAs is thus a way to protect all those Open Source contributors who are not necessarily shareholders or employees of a company or beneficiaries of a foundation.

If you care about Open Source, legal personality of ITAs is a legal construct to support the fourth Freedom of Open Source, whereby “you can give the whole community a chance to benefit from your changes.” Without legal personality, when an ITA is developed on top of the code that you have generously contributed to the community, and inadvertently that code creates some damage in the real world through the actions of the ITA, you could become a liability target. You can protect yourself, if your ITA is given legal personality.

(Note well: this reasoning does not apply to Open Source in general, but specifically to those developments that contribute to the creation of an ITA. The ordinary open source program can always be shut down and removed from known servers. The open source program embedded into an ITA will have the features of autonomy of the ITA; and hence can produce damage beyond the original intent of its designer.)

Conclusions

The notion of giving legal personality to an ITA seems like an attempt to regulate the world of decentralized applications, and to try to reel them back into the centralized power control structures of convention. An enlightened approach is to recognize that decentralized ITAs cannot be regulated in any way; but that legal personality is there to provide guarantees and protections – by infusing it with legal certainty on critical issues, one of which is liability – for the humans that operate around and interact with the ITA, whether that is as a designer, a consumer or an investor of sort.

In particular we have highlighted why legal personality is important for the developers. We haven’t touched upon how legal personality can be realized in practice: that requires some new laws and rules, as well as the intent of the designers to create ITAs that are good enough citizens to be awarded with legal personality – and might be the topic of another post.

At the end it will be a voluntary choice of the designers if they want to afford of this form of legal protection and have the freedom to innovate. This is not a rule that is being mandated; it is an option of free choice, given to the developer community to preserve and enhance the freedom to innovate and continue creating a decentralized world.


Update 2018-08-21

Coincidentally, as I was writing this post, Remarks of Commissioner Brian Quintenz at the 38th Annual GITEX Technology Week Conference were published. Brian Quintenz basically expresses the position that developers should be held responsible for crimes committed or damages incurred through their code. Since he is a CFTC official, his viewpoint bears considerable weight.

An interesting commentary to the remarks can be found in a TweetStorm by Drew Hinkes. All of this just goes to show that the proposal of giving legal personality to ITAs makes even more sense: this innovation in law would be a watershed event for the whole industry, helping all developers and designers to continue to innovate with the greatest degree of freedom.


Acknowledgements

Thanks to Dr. Max Ganado for providing feedback on an early draft of this piece, and for numerous exchanges during the last couple of years, during which these ideas were developed.

About the Author Steve Tendon

Steve Tendon is a senior executive management consultant, adviser, speaker and author. Steve’s research and consulting work focuses on the use of emerging technologies — in particular Blockchain technologies — to improve business performance. He holds a MSc in "Software Project Management" with the University of Aberdeen, a "MIT Fintech Innovation: Future Commerce" certificate with the Massachusetts Institute of Technology, and an Oxford "Blockchain Strategy Programme" certificate with the Saïd Business School at the University of Oxford. In 2016 he was the strategic adviser for the Ministry of Economy, Investment and Small Business of the Maltese Government, and developed the vision of "Malta the Blockchain Island." He was the lead designer and author of Malta’s "National Blockchain Strategy," which was approved by the Cabinet of Ministers in April, 2017. Subsequently he was appointed to Malta’s National Blockchain Task Force advising the Ministry for Financial Services, Digital Economy and Innovation within the Office of the Prime Minister on further developing and implementing the country's blockchain strategy. In 2018 he was acclaimed in the "Lattice80 Blockchain 100" list of global Blockchain influencers (http://www.lattice80.com/lattice80-blockchain-100-report/).

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